How does it affect you?

The Property Right Law of the People's Republic of China can be seen as having two functions:

as a symbolic, express recognition of private property rights and commitment by the Communist Party towards developing an open market economy; and

it introduces a number of specific reforms to the existing property and securities regime in the PRC.

Almost 2800 – or 96.9% – of the lawmakers that comprise China's National People's Congress (NPC) voted in favour of a long-debated law, which is designed to protect private property rights, on 16 March 2007. The Bill, which has taken seven readings and 13 years of debate to pass, marks a milestone in China's path towards a market economy.

Individual property rights defined and recognised

The Property Right Law of the People's Republic of China (the Property Law) provides, for the first time, a unified definition for, and introduces the concept of, a 'property right' in China. It also expressly protects an individual's property rights from infringement at the same level as State and collective rights, and affords specific protection for mining, mineral and other use rights. This is a first in China, which is still a Socialist country, and where land cannot be privately owned. Under the current framework, purchasers of residential and commercial real estate, as well as farmers, receive grants of lease for up to 70 years, with the underlying fee simply reverting to the State or the collective at the end of the term.

Specific reforms to China's property and securities regime

In addition to the express definition and protection of property rights, the Property Law also introduces a number of specific amendments that provide more certainty and flexibility for the private sector. We set out some of these changes below.

Automatic renewal for land use rights

The single biggest change introduced by the Property Law is that land-use rights for construction land used for residential purposes will now be 'automatically renewed'. Previously, there was no guarantee that a new term would be granted after a land-use right expired. As all residential property rights in China are by way of lease, a grant for a fixed term, or a transfer or assignment of such rights, there has been a great deal of uncertainty and concern from residential property owners and investors about what will happen once their land-use rights expire. By providing for an 'automatic renewal', this provision provides certainty for owners of residential property in China. The specific details of how the 'automatic renewal' will work are still unclear, and it is uncertain whether it will require an administrative charge, or what procedure will have to be followed.

The Property Law may, however, treat residential and non-residential land-use rights differently, as, in relation to non-residential property rights, the Property Law simply states that they shall be 'renewed according to legal provisions'. These additional 'legal provisions' have not been enacted, so it remains to be seen whether non-residential land-use rights will in fact be treated differently from residential land-use rights, and what process such rights holders will have to follow to renew their property rights.

Provides for unified registration of titles

The Property Law moves China closer to having a system of registration of land by title, by creating a unified system of registration for property titles. The details of how this unified system will be established and operate have not been specified, so it is uncertain how the system will work in practice. Currently in China, there is no unified registration system for property. In some instances, this requires purchasers to trace back to the original land-use right granted by the Government, and subsequent transfers to establish whether the current vendor's registration certificate is valid. Therefore, the creation of a unified system of registration of title will provide much greater certainty for purchasers of land-use rights in China, as well as greatly reduce the transaction costs currently incurred when buying and selling realty.

The Property Law also enacts new measures to make the current registration system more transparent and accountable, such as forbidding multiple registrations of a single property, requiring authorities to publish set fees for registration and making authorities liable for any mistake on the register that occurs through their fault.

Advanced registration

A standard, nationwide advanced notification system is to be implemented for the registration of all real property. The system allows parties who enter into a sale-and-purchase agreement on a property right to lodge an advanced notification of registration with the registration authority. Once registered, there can be no disposal of the property right in question without the consent of the holder of the advanced registration notice. Therefore, the advanced registration notice will protect a purchaser's rights during the period between signing a sale-and-purchase agreement and registration.

Security interests over property

The Property Law expands the types of property over which a security interest may be created to include manufacturing facilities, raw materials and unfinished goods not yet in existence. These new classes of property allow for the first time the use of a moving class of goods as security like a Western law floating charge. The Property Law also specifies that a mortgage may be granted over any kind of property, unless it is expressly prohibited by law or regulations. Therefore, any property right may now be mortgaged, unless it has been expressly prohibited. The same does not apply to pledges. Only those classes of rights that have been expressly specified as being able to be pledged may be pledged. The classes of goods that may be pledged have, however, been expanded to include accounts receivables and fund units.

Greater flexibility for security holders

The Property Law provides more flexibility for security holders by allowing the parties to specify, by way of contract, events that will trigger enforcement. Previously, a security holder could only enforce its interest in the event of non-payment by the debtor. It now allows, upon agreement of the parties, that, in the event of default by a debtor, the security holder may require the guarantor to make payment to the security holder before the security holder enforces the security against the debtor.

Clarifies position on ownership of common areas of buildings

The Property Law specifies that, within a building zone, the common areas (such as lifts, green areas, entrances and internal roads) shall be owned in common by the individual unit owners of the building. While such rules relating to common ownership of common areas have already been enacted as secondary legislation by certain Central Government departments and Provincial Governments, this is the first time such rules have been issued by China's primary legislative body, the NPC. The aim is to create a consistent national set of rules to govern common areas.

Conclusion

Many of the details of how the law will be applied in practice are not yet clear. Many of the provisions have been defined generally or are silent as to the mechanics of how they will operate. Therefore, much will depend on the detailed implementation guidelines that are to follow and subsequent interpretation by the courts.

Overall, the Property Law can be viewed as a symbolic step by the Government towards creating an open market economy. It also contains a number of specific improvements that can be seen as steps forward in moving China's underlying legal framework closer to a modern, functioning, market economy.

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